Reverse 1031 Exchange - Who has done one?

Question

I have a client in Reno doing two reverse 1031 exchanges and we've been able to secure some great deals putting out some cash offers (both weren't even countered).

I'm curious, has anyone else done a reverse 1031 exchange before? What're the pros and cons in your opinion?

Arn Cenedella · Answer

@Jake Andronico

I’ve looked into them but have never executed one.

Let me say they will be expensive and complicated.

I think what you will find if one is trying to defer $50,000 to $100,000 in gain, it’s not going to be worth the time and trouble.

On the other hand, if client is trying to defer gain of $500,000 to $1,000,000, it’s worth the time and trouble.

I use First American Exchange for my own account a dozen times and they have been right on the money.

Google them and reach out.

Arn

Sean O'Keefe · Answer

me

Dave Foster · Answer

@Jake Andronico, I appreciate @Alex Olsons shout out.  Reverses are a little complicated and expensive.  But that doesn't mean they can be perfect for you.

You may be in a situation where you don't even need one however.  You can always go into contract for your new properties before you close the sale of your old property.  You just have to close the sale of your old property before you take title to the new properties.  It sounds like you've got some motivated and cooperative sellers.  Maybe you could extend the closings with some additional earnest money (even if you release it) and buy the time so you can simply do a regular 1031 exchange.

If not, then a reverse exchange for us to simply hold the property for up to 180 days is possible.

Mackay Oakey · Answer

New concept to me--What does the timeline look like on a reverse 1031 exchange? Do you get the same tax benefits as you would with a regular 1031 exchange? I assume that the main advantage is being able to buy the property without the 180 day time constraint? @Dave Foster

Henry Clark · Answer

OP Will use our deal.  About 15 years ago.  48 acres bought at $1,000 per acre.  Sold for $3,000.  $96,000 gain.  Land we bought in the exchange we held for 15 years.

So it cost us the full say $6,000 charge.  Say tax of 25% for ease on the $96,000 gain.  Or $24,000 tax.  Forget state.  $24,000 loan from the government at 5% or $1,200 per year for 15 years or $18,000 savings.

I would say it was worth it.  Plus the difference between the $1,500 1031 charge and the say $6,000 reverse charge to me was worth it.  Greater control of the timeline.

Henry Clark · Answer

OP when you say more expensive, can you give numbers?  Even 3x higher is worth the benefit.  Somewhere there is a relative scenario where it’s not worth it.  Example: $100,000 versus $70,000 basis.   I would say pay the taxes.

Becca F. · Answer

Great question. I'm looking into possibly doing a 1031 or reverse 1031, have kind of identified potential markets.

What are fees associated with the Qualified Intermediary holding onto this money? Does it outweigh paying the capital gains tax? Do capital gains offset passive losses that the investor has, so someone really isn't paying a high capital gains tax as they thought?

Alex Olson · Answer

If you have never completed a regular 1031 exchange I can not recommend a reverse 1031 exchange. Risky for your client and they rarely work out. Your QI will own the property you are buying and you have to have bought the property before you sell the downleg. @Dave Foster is the man when it comes to this stuff.

Ashish Acharya · Answer

@Jake Andronico A reverse 1031 exchange allows you to buy a replacement property before selling your relinquished property, offering flexibility in competitive markets and deferring capital gains taxes. Pros include securing the desired property and strategic planning, while cons involve higher costs, financing challenges, and complexity. Tax impacts include deferred gains, adjusted cost basis affecting future depreciation, and strict adherence to IRS timelines. While effective, reverse 1031 exchanges require thorough planning and are best suited for strategic investments.This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Reverse 1031 Exchange - Who has done one?

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